How to Start a Business in 10 Steps
- Step 1: Research and find a business idea
- Step 2: Write a business plan
- Step 3: Choose your business’s legal structure
- Step 4: Register your business
- Step 5: Apply for licenses and permits
- Step 6: Obtain funding for your small business
- Step 7: Assemble your team
- Step 8: Open a business bank account
- Step 9: Learn how to manage your finances
- Step 10: Start running and promoting your business
Starting a small business is a big, scary step into the unknown, but just by considering the option, you’ve taken the first crucial step. After all, as someone who’s never done this before, you’re likely feeling a little nervous and possibly overwhelmed—but don’t let these feelings stop you. Certainly, being a small business owner isn’t easy and it comes with its fair share of risks. And, if you are asking: “how do you start a business,”, you’ve probably heard the stats about business failure.
But, if you’re one of those brave individuals willing to take the chance, there are substantial rewards to be gained from diving into this endeavor. For example, the average entrepreneur’s salary is currently around $70,000—higher than the nationwide average for American workers. Plus, you get to be your own boss, potentially create jobs, and contribute to your local economy and community.
This being said, knowing you want to start your own small business doesn’t necessarily mean you know how to start a business and make your dream a reality.
In our “how to start a business” guide, therefore, we’ll break down 10 essential steps you can take to start your business—covering everything you need to know in order to launch a successful, profitable small business that customers will love.
Let’s get started.
Step 1: Research and Find the Perfect Business Idea
When you’re first thinking about how to start a business, you’ll likely fall into one of two categories. First, you might be a reluctant entrepreneur—you’ve stumbled on an amazing business idea, but are unsure about the process of launching a new business. If this is the case, you can skip ahead to the section discussing market research—even if you think you have an excellent business idea, you need to do adequate market research to make sure your target audience feels the same way.
On the other hand, you might have the ambitious, independent, adventurous vibe of an entrepreneur. In this case, you might be itching to get out of your day job, but have no idea what kind of small business to start. Businesses exist across many variables, and therefore, it’s important to think outside the box.
In this way, when you’re trying to determine how to start a business, the first step you’ll want to take is to decide on the perfect business idea.
To find the right business idea, you can ask yourself a few primer questions, such as:
- What skills do you have? Figuring out how to start a small business is a steep enough learning curve without also having to gain skills for a new trade. Your answer to this question, therefore, might involve a hobby or passion, skills from a previous job, your college major, or a particular natural talent. It might be the case that your business combines knowledge from multiple areas, and you and any business partners bring complementary skill sets to the table.
- What resources are at your disposal? Starting a small business will likely require a significant investment in resources in order to be successful. By determining what you already have available, you can find a business opportunity with minimum expenses and maximum profitability.
- What need could you fill? As you look around your own little corner of the universe, what product, service, or convenience do you see as missing? What consumer or business need is still left to be filled? Many of the most successful business ideas come from identifying a problem and then inventing the solution.
- Can you break into an industry with existing players by doing something better or different than they’re doing? You don’t always have to be the first entrant in a particular industry. For example, the ride-sharing giant Uber actually launched after its biggest competitor, Lyft. However, even though Lyft launched first, by automating more of the ride-hailing process, Uber captured the biggest market share.
Test Your Idea With Adequate Market Research
After you develop what seems like a strong business idea, you’ll want to do some market research and see what actual customers think. Much of the market research stage involves getting information about who your customers are and what they want or need. You can use a combination of focus groups, online surveys, and phone campaigns to evaluate your buyers. You can also run online ads or content and see what level of engagement they command.
In addition to talking directly with customers, it’s also vital to understand industry trends, economic data, and market statistics—and how all of this information might impact your business idea. All of the findings from your market research will be a crucial part of your business plan.
Step 2: Write a Business Plan
With the first step in our “how to start a business” guide out of the way, you can move on to step two: writing a business plan. Regardless of which business idea you decide to pursue, a strong business plan is essential to successfully starting a small business.
Although you may want to jump on your idea and get started right away, taking the time to sit down and write out a business plan is easily one of the smartest, most important steps you’ll take in launching your business. In fact, studies have shown that businesses with plans grow 30% faster than businesses without plans.
Certainly, the idea of writing out a complex and detailed business plan might seem overwhelming, but luckily, there are a number of ways you can write your business plan—and you can complete the process by breaking it down into a handful of steps.
Moreover, in the current business environment, a traditional business plan should only be 30-50 pages—and can be even shorter if you’re writing what the SBA calls a “lean startup” business plan. At the end of the day, the best business plans are substantial enough to convey essential information that a lender, investor, or prospective business partner would need to know, and no longer than that. Plus, there are plenty of resources online, like business plan software, that can show you what to include in your business plan and how to make it look professional.
At its core, writing a business plan is about thinking through and answering difficult questions about your small business—questions that, when considered, will force you to contemplate the purpose of your business, the market you serve, and challenges you might not have thought of otherwise. When done correctly, the process of writing your business plan will lead you to refine your initial idea into something much more resilient and clear, which promises future success.
This being said, these are the 10 main questions that you’ll want to answer as you go through the process of creating your business plan:
- What does your small business do?: Once you have a business idea, you’ll want to take a moment to write out, in the simplest terms, what product or service your business offers.
- Who is your small business for?: This is called your target market—the group of people whom your business is meant to serve. The more specifically you can answer this question, the better you’ll be able to create products, services, and marketing campaigns that meet the needs of your demographic.
- Who are your competitors?: As you’re starting your business, it’s extremely important to research and find out who your main competitors are and how their businesses are similar and different from yours. This research will save you from generating a business model that too similarly mirrors an already established alternative.
- What is your unique value proposition?: In other words, what is it about your business that will cause your customers to choose you over your competitors?
- How will your customers find you?: Your answer to this question will form the foundation of your business’s marketing strategy. You might think about paid advertising, social media, your online presence, as well as simple word of mouth.
- What resources will you need?: You’ll want to consider what resources you’ll need to create your product or provide your service—including equipment, physical space, employees, and more. This being said, you’ll want to take the time to list out all the one-time and recurring expenses you’re likely to incur as part of your cost of doing business.
- How will your small business make money?: To answer this question, you’ll want to create a business model, which will determine how your business will generate revenue, cover expenses, and—eventually—make more money than it spends.
- How long will it take you to make a profit?: To determine how long it will take to recuperate your initial investment, break-even, and run a profitable business, you can create a revenue forecast. Financial projections will help you estimate how much revenue and profit your business will make three to five years in the future.
- What values will you never compromise?: By putting your business’s core values on paper from the outset, it will be easier to make the right hiring choices, as well as decide which direction to take when you’re facing a critical fork in the road.
- What’s your endgame?: You’ll want to consider where you want to end up, and when—as these plans will inform many of your business decisions along the way. Therefore, as you write your business plan, take the time to outline your long-term goals, your endgame, as well as the steps you think you’ll take to get there.
Step 3: Choose Your Business’s Legal Structure
Now that you’ve completed some of the big-picture planning, it’s time to get down to some of the finer details involved with starting a small business. One of the points to note about how to start a business is that you’ll have more paperwork and legal requirements to fulfill when you begin than at any other point in your business. This being said, however, taking the time to properly establish your new business from the start will save you time, effort—and potentially even greater consequences—down the line.
Therefore, the first of these “official” tasks on your new business to-do list is to decide on a business entity structure for your business. The structure you choose will impact how you file state and federal business taxes, the roles of different team members, and how you can be held liable in the event that a customer or other stakeholder files a legal claim against your business.
Because of the long-term and potentially weighty impact of your chosen business structure, it’s a good idea to consult a business attorney to help you make this choice. Here’s a quick primer into the various business structures you can choose from:
This is the most basic form of business structure, in which you alone own the company and are responsible for any liabilities associated with it. If you plan to operate a service business and won’t be taking on fixed assets or hiring any employees, a sole proprietorship might be the perfect structure for you.
This structure defines a single business in which two or more individuals are owners. There are a few different small business partnership structures you can choose from, including a general partnership, a limited partnership, or a joint venture. Most lawyers won’t recommend partnerships as a business structure, however, because, like sole proprietorships, they don’t offer much protection from liability.
A corporation is a more complex business structure usually reserved for larger companies or those in particularly high-liability industries looking for a little extra insulation. If you expect your business to eventually take on a lot of employees, it could be worth setting up a corporation now. A C-corporation is also the best business structure for raising money from investors.
This business structure is very similar to a regular C-corporation, with one notable exception: C-corps face double taxation. They are taxed once at the business level, and then shareholders get taxed again on dividends at the personal level.
In contrast, S-corporation income passes through to a business owner’s personal tax return. If you think you may need the structure of a corporation but don’t want to mess with complicated dividend filings, an S-corporation might be a great middle-ground for you.
Limited Liability Company (LLC)
Offering the liability protections of a corporation along with the flexibility and tax simplicity of a sole proprietorship or partnership, the limited liability company (LLC) is a “best of both worlds” business structure that has grown significantly in popularity over recent years.
Ultimately, choosing a structure for your business is one area where your smartest bet is to consult a business attorney for individual advice. It’s an important decision that will have long-term impacts on how you do business, so you’ll want to do your research and make sure that you fully understand the implications of whatever structure you choose.
Step 4: Register Your Business
After you’ve decided on the legal structure for your company, the next step to discuss in our “how to start a small business” guide is registering your business. As we mentioned above, taking care of these legal obligations from the beginning will save you from greater hassle in the long run. This being said, here are some of the tasks you’ll need to take care of to get your business legally established with the proper federal, state, and local authorities.
Register Your Business Name
If you plan to use a trade name for your business, you’ll need to file your fictitious business name, also known as a “doing business as” or “DBA” name, with your state’s agency. In most cases, only sole proprietorships and partnerships need DBAs.
Get a Tax Identification Number
Also known as your employer identification number (EIN), your tax identification number helps the IRS keep track of your business for tax purposes. Essentially, you can think of this number like a social security number for your business.
If your business is established as a corporation or partnership, you’re legally required to get an EIN. Sole proprietors and LLCs also have to get an EIN if they plan on hiring employees. You can obtain an employer identification number easily and for free by applying online on the IRS website.
Register for State and Local Taxes
In addition to federal business taxes, most U.S. states and territories will require you to pay income and employment taxes for your business. Certain states have additional fiscal requirements, like state-mandated workers’ compensation and unemployment insurance.
Registration, requirements, and filing procedures vary widely from state to state, so you can visit this State and Territory Business Resource page to access business tax information specific to where you live.
Step 5: Apply for Licenses and Permits
Once you’ve registered for federal, state, and local taxes, as well as established your business name, there are a few additional applications left to complete to ensure that your business is compliant with legal requirements.
Get a Business License
Many localities and states require new businesses to get a business license or permit before they can start operating. In some communities, there’s a generic business license for every type of business.
In other areas, certain highly regulated businesses, such as childcare centers and foodservice businesses, need to apply for special types of business licenses or permits. Therefore, you’ll want to make sure that you check the regulations for your industry, state, and municipality to ensure that you get all of the licenses or permits you need to legally start your business.
Apply for Any Needed Trademarks or Patents
Although this may not apply to everyone starting a small business, it’s nevertheless worth considering if you need to file a trademark or patent. Does your business revolve around a new invention, or rely heavily on a particular brand? If so, you may want to register a trademark or file for a federal patent to protect your intellectual property.
The process of obtaining an official patent or trademark from the U.S. government can take months or even years—so if you think this will be important for your business, go ahead and get those applications submitted sooner rather than later.
Step 6: Obtain Funding for Your Small Business
As you learn the ins and outs of how to start a business overall, you’ll also need to learn how to finance a business. At some point, you’ll need financing to either deal with short-term cash flow challenges or to fund the growth of your business. Although there are some businesses which are completely bootstrapped by profits, that isn’t the norm. Most business owners must obtain business loans or other external funding.
With this in mind, you might choose to finance your business in any variety of ways. You might reach out to friends and family, pursue debt financing in the form of a business loan, or even work with an investor. Below, we’ll review the basics of various financing options you may want to consider.
- Term loans: Probably the first type of financing you think of when you imagine debt financing, business term loans offer a set repayment date, a fixed number of payments, and a fixed or variable interest rate. Term loans can be great options for funding one-off, specific purchases for your business. In addition, short-term business loans can be useful to finance working capital and other more immediate needs.
- SBA loans: There are a variety of SBA loan programs available to suit different business demographics and needs. These loans are partially guaranteed by the SBA, but originate from lending partners, typically banks. SBA loans operate the same way as term loans, but also have some of the best rates, terms, and interest rates on the market.
- Equipment financing: This financing product works very similarly to a car loan, where the amount you can borrow depends on the price and type of equipment you’re borrowing. Overall, equipment financing is a worthwhile option if you’re specifically looking to make a big equipment purchase (think computers, machinery, vehicles, and so on).
- Invoice financing: Also known as accounts receivables financing, invoice financing is a system in which companies buy your accounts receivable through a quick loan of about 80% of the value of your invoices. If delayed payments from clients are seriously endangering your cash flow, invoice financing is a great option to get your receivables back on track.
- Business lines of credit: Perhaps the most flexible form of business funding available, a business line of credit gives you capital to draw upon to meet a variety of business needs. Once established, you can draw on your line of credit as you would a personal or business credit card: to get more working capital, buy inventory, handle seasonal cash flows, pay off other debts, or address almost any other business need.
All of this being said, small business loans aren’t the only way to finance your business. Instead, you might try to find investors to help you cover the initial costs of starting a small business. Here are some funding alternatives you might consider:
- Angel investors: Angel investors are individuals of means—often successful entrepreneurs themselves—who choose to personally invest in a wide variety of startup ventures to further their own incomes and give back to other entrepreneurs with their resources and expertise.In exchange for financing and expertise, you’ll be giving this individual equity shares in your business, and in many cases, they’ll also obtain a certain amount of decision-making power.
- Venture capital firms: Venture capital firms are highly organized, established companies that fund larger-scale business ventures by purchasing a percentage of the business during each round of funding. It’s important to note, however, that funding your business through a venture capital firm can be highly competitive and has a barrier to entry that most small business owners are not able to meet.
- Friends and family: If your family and friends seem supportive of your business venture, they might be willing to invest funds to help your business succeed. Of course, accepting funds from friends or family comes with its own set of challenges. Therefore, if you choose to go this route, you’ll want to do everything you can to keep it professional.
- Crowdfunding: Platforms like Kickstarter or IndieGoGo are great for smaller ventures looking to offer product samples or other goodies in exchange for a contribution. Larger-scale ventures might consider equity crowdfunding platforms like EquityNet that sell company equity to capital investors in a crowdfunding format.
Step 7: Assemble Your Team
When you’re learning how to start a business, you want to remember that an organization is really only as effective as its people. Therefore, the next step you’ll want to take in starting your small business is to plan out your team and start hiring the help you need.
When you’re just starting out, it will be very clear who can help take the business to the next level and who isn’t pulling their weight—meaning that your hiring decisions will be all the more important. This being said, however, you don’t necessarily need to hire an entire team of full-time employees.
Your team might consist of freelancers, virtual assistants, consultants, and contractors. Moreover, any driven person or business who delivers on your company’s mission is part of your core team—including your accountant, attorney, key investors, and business mentors.
As you begin to build your team, if you decide to hire independent contractors or employees, you’ll want to devote a substantial amount of time to creating job descriptions and interviewing candidates. In a startup business, job descriptions only go so far, so you’ll want to use interviews to get a sense of people’s attitudes and their level of comfort with uncertainty. If a person has a proven history of using initiative to get results, then they’re more likely to be the right fit.
In the beginning, most business owners don’t have the budget for a full-scale HR team. If possible, hiring even one HR staff member early on can save you both time and legal headaches. Since hiring is an area with extensive regulations, you’ll want to ensure that you have an equitable, fair hiring process that’s open to all qualified candidates.
If you can’t hire HR staff in-house, consider working with a professional employer organization or staffing agency. They can help you with hiring as well as other HR tasks, such as benefits administration.
Step 8: Open a Business Bank Account
With your hiring initiatives planned out, you’ll want to start taking steps with regard to your business’s finances and finally, actually getting up and running. This being said, one of the first important tasks to complete is to choose and open a business bank account. In fact, when it comes to any checklist on how to start a small business, this is one of the most important steps not only for getting started, but also for the future of your business’s financial growth.
After all, your business bank account is going to be the place where you house all of your funds, as well as the vessel you use for paying your bills and receiving payments from customers. Additionally, opening a business bank account is crucial to separating your personal and business finances.
Since you’ve already gone through the necessary steps and applications to get your business in compliance with the law, you don’t want to risk other potential legal issues by not establishing a difference between your personal and business finances. With a business bank account, therefore, you’ll be able to separate your expenses, protect your personal funds and assets, and ultimately, save yourself time and effort when it comes to both bookkeeping and taxes.
If you’re just starting a small business, you’re likely going to want to choose a business checking account, as opposed to a business savings account. You’ll want to take a look at all of your available options and consider what any bank account includes—features such as monthly fees, transaction limits, cash deposits, wire transfers, and more.
Moreover, when you’re exploring different business bank accounts, you’ll find that you have choices from traditional, brick-and-mortar banks, like Chase, as well as online-only banks like Azlo or Novo.
Ultimately, it will be up to you to decide which business checking account is right for you. However, the most important point to remember is that you’ll want to open one earlier in your business’s timeline rather than later.
Step 9: Learn How to Manage Your Finances
With all of these steps completed, the next step in our “how to start a business” guide also relates to your business’s finances. Even after you’ve opened your business bank account, there are still a few important processes that you’ll need to learn in order to properly manage your finances.
Although business finance, on the whole, may appear overwhelming, there are a few core financial concepts that you should understand, even if you’ll be hiring an accountant or tax professional—but they’re not nearly as complicated as they may seem.
Here’s a beginner’s guide to what you need to know about managing finances when starting a small business:
Set up Basic Accounting Documents
One of the essential pieces of managing your finances will be your business accounting—which means a lot of paperwork. You’ll need accounting documents to file your taxes, apply for business financing, and for internal tracking of your revenue, expenses, and profitability.
At a minimum, every small business owner should regularly maintain these three basic financial statements: a balance sheet, an income statement, and a cash flow statement.
Choose the Best Accounting Software
Managing your financial documents by hand can quickly get overwhelming. Luckily, there are several great business accounting software options available that will take the guesswork out of your bookkeeping and generate these accounting documents automatically.
As you’re searching for the right accounting software for your business, you might decide on a tried-and-true solution, like QuickBooks Online, a user-friendly and mobile-accessible option, like FreshBooks, or a truly free accounting software, like Wave.
Hire a Bookkeeper or Accountant
Although the right software can do wonders to help you manage your small business finances, there are some areas of small business accounting that are beyond the capacity of the average small business owner.
Therefore, if you have the resources, you’ll want to work with a business bookkeeper or accountant in some capacity to help you manage your finances. You can ask around to your attorney, banker, and fellow business owners for a recommended certified public accountant, and start building a relationship with your new CPA right away. It’s important to choose someone whose personality fits with yours, who will be available to answer questions as needed, and who can handle financial areas where you have less experience.
This being said, however, regardless of who you choose as your accounting professional or what responsibilities you decide to hand over, it’s essential that you stay personally involved in your small business finances, and that you have checks and balances in place to avoid theft or fraud. You’ll want to pay attention to all of these processes and remember that you are ultimately responsible for the finances of your business.
Keep up With Business Tax Obligations
Along with getting your books in order, you’ll want to make understanding and fulfilling requirements for your business taxes a top priority in your financial management. The consequences for failing to file your state and federal taxes are severe—you could lose your business and even face criminal charges. So even though dealing with the IRS can be intimidating, this isn’t a responsibility you want to leave to the wayside.
Learn more about the main business tax obligations you’ll need to keep track of in our guide below:
Step 10: Start Running and Promoting Your Business
As we reach our last step, we’ve covered all of the essentials you need to know about how to start a business. Once you’ve gone through all of these tasks and processes, you’re ready to get your business up and running.
At this point, the tasks that you’ll still need to complete will largely be specific to your operation, but you’ll have already completed your legal requirements, financial planning, team building, and much of the planning necessary to have officially started your business.
Therefore, as you work to finally declare yourself “open for business,” you’ll want to be sure to follow your business plan, keep an eye on your financials, utilize your team, and of course, maintain a positive attitude if any challenges come your way.
Once you officially start running your business, promoting it properly will be a top priority. You’ll want to decide the channels you’re going to use to promote your business and the specific methods you’ll be taking to drive customers to your business and get the ball rolling.
As you move along, you might start with a few particular marketing tactics and adjust them based on the responses (or lack thereof) you receive. Once you’ve figured out the promotional methods that work for you, you can settle into managing your operations on a day-to-day basis and eventually start thinking about growth and what the future may hold for your small business.
The Bottom Line
The truth is, figuring out how to start a business is no easy task. We’ve done our best to explain the nuances that are involved in launching and successfully growing a strong, healthy small business, but at the end of the day, being an entrepreneur is not for the faint of heart—owning your own business is a never-ending, 24/7 adventure.
Therefore, as you go through the process of starting a small business, you’ll want to keep in mind that the learning curve will be constant, Google will be your best friend, and the challenges and questions that come up for each business owner will vary as widely as the different types of businesses that exist out there. When it comes down to it, there’s a universal answer on how to start a business.
Nevertheless, we hope that our comprehensive guide on how to start a business answered some important questions and gave you a preview of things to come.
For an even more detailed information on how to start a business, download our 4-step guide to starting a small business below.
Our “how to start a business” ebook covers:
- How to discover the perfect business idea
- How to craft an airtight business plan
- The legal process of starting a business
- How to deal with business taxes, licenses, and permits
- The best ways to manage your business finances—and more
- Ride.Guru. “Lyft has Been Around Longer than Uber. History Lesson.”
- ScienceDirect.com. “Should Entrepreneurs Plan or Just Storm the Castle? A Meta-Analysis of Contextual Factors Impacting the Business Planning-Performance Relationship in Small Firms“
Latest posts by Meredith Wood (see all)
- Fixed Charge Coverage Ratio: Definition, Formula, Examples - September 21, 2020
- Where and How to Get Government Contracts for Small Businesses - September 20, 2020
- The Advantages and Disadvantages of Sole Proprietorship - September 18, 2020